Update: Climate Change Financial Reporting

The Government’s plans to embed financial reporting into its long-term environmental sustainability strategy continue apace.

Since 1 April 2019, the streamlined energy and carbon reporting (SECR) obligations (introduced by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018/1155) have required reporting on emissions, energy consumption and energy efficiency action by quoted companies, large unquoted companies and large LLPs.

However, one of the aims of the Government’s Green Finance Strategy is to ‘green’ the UK’s financial system by means of disclosure of climate-related financial information; namely how businesses will manage their financial risks and opportunities arising from climate change (including for example, increased temperatures, extreme weather, policy, regulation and consumer sentiment).

More dramatically, ahead of the UN Climate Change Conference (COP26) in Glasgow later this year, the Government has expressed its aim to ensure that every financial decision takes climate change into account.

Last month:

-HM Treasury has updated the remits of the Financial Conduct Authority (FCA) and the Prudential Regulation Committee (PRC), which supervise financial services firms, requiring that they take into account the Government’s legally binding commitment to a net-zero economy when considering how to advance their objectives and discharge their functions. 

-BEIS has published a consultation document seeking views on proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and large limited liability partnerships (LLPs) in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations.

These developments further demonstrate the Government’s intention to build deep into the financial system mechanisms intended to achieve its climate objective. Although presently, only publicly quoted companies, large private companies and large LLPs fall within the scope of the SECR and the BEIS consultation, BEIS will review the case for expanding the scope of the regulations in 2023.

Companies not currently within the scope should take notice; there is a clear direction of travel in relation to climate-related financial reporting and as requirements continue to be strengthened, compliance challenges will be created. They will need to ensure necessary systems are in place to track climate change-related developments and monitor performance against targets. Failure to comply could result in sanctions, fines and potentially civil claims for compensation. 

But opportunities will also be created. Businesses that have the foresight to read the runes, innovatively adapt best practice from those organisations currently in scope, and who can successfully weave this into their medium and long-term strategies will be ahead of the game.

Forewarned is Forearmed.

By David Summerhayes

David Summerhayes is Director of Legal Services for Northern Gas and Power. He has extensive knowledge in commercial law, having represented multinational corporations, FTSE 100 companies and fast growing SMEs, occupying senior positions at global and national law firms, including Partner with Sintons LLP.